Ukraine’s dilemma: Creditors refuse to write off $10bn debt

A committee of Ukraine’s private creditors that hold about $10 billion in Ukrainian bonds is against any write-downs in its debt-restructuring deal. The bondholders’ terms jeopardize Ukraine’s bailout package from the IMF.

Ukraine’s creditors are expecting a “speedy resolution”
to negotiations “without any principal debt reductions,”
the committee said in a statement released by Ukraine’s biggest
bondholder Blackstone Group, Bloomberg reported Friday. The group was working on a
plan that “provides Ukraine with the necessary financial
liquidity support,” according to the statement.

Ukraine has to pay about $10 billion to service its debt this
year, including corporate and sovereign loans and bonds. The
total debt of Ukraine is currently estimated at $50 billion.
Public sector debt rose to 71 percent of Ukraine’s gross domestic
product, and is due to rise to 94 percent of GDP in 2015,
according to the National Bank of Ukraine.

Meanwhile, Ukraine has to reach an agreement with creditors by
the end of May to save $15.3 billion over 4 years as a condition
for receiving the next tranche of a $17.5 billion International
Monetary Fund loan which comes in exchange for economic, budget
and monetary reforms in the country. A debt-to-gross domestic
product ratio of below 71 percent by 2020; and the budget’s gross
financing needs at an average of 10 percent of GDP from 2019 to
2025 are also among the restructuring demands from the IMF.

“This is how restructuring negotiations always start, with
unrealistic proposals. For sure, the creditors will try to
achieve a deal with no principal reduction, but realistically it
is not viable,” Michael Ganske, who helps manage $6 billion
as head of emerging markets at Rogge Global Partners in London,
told Bloomberg.

“Ukraine’s debt-to-GDP is much too high and the economy is
shrinking,” Ganske added.

Russia is Ukraine’s second-biggest creditor as it holds a $3 billion Eurobond issued in
December 2013 with a maturity in December2015. Moscow is not
going to demand early repayment of the loan, despite the fact
that one of the contract’s conditions was violated as Ukraine’s
national debt exceeded 60 percent of the GDP, according to RIA
Novosti.

Financial dilemma

Meanwhile, Ukraine is seeking to restructure at least $21.7
billion of its public debt. The country’s central bank reserves
fell dangerously below $5.6 billion in February, and the national
currency, the hryvnia, has lost more than half of its value in
the past six months and emerged as the worst performing currency
in 2014. Ukraine has thus been forced into negotiations with the
bondholders.

The weakening currency has led to massive inflation, which has
reached 272 percent last year by some estimates. Officially it
was 34.5 percent in annual terms as of February and is expected
to reach 30 percent for the whole of 2015. Ukraine also has
outstanding Russian energy debts now standing at about $2 billion
that it must pay if it wants to continue receiving natural gas.

In return for the IMF funds, Ukraine has embarked on tough economic reforms, which include cutting
pensions, raising the retirement age, trimming the state budget,
and getting rid of wasteful gas subsidies.

“Now it’s official that major bondholders will be resisting a
haircut,” Giuliano Palumbo, a money manager who helps
oversee $3 billion in emerging-market debt for Arca SGR in Milan,
including Ukrainian bonds, told Bloomberg. “But frankly
speaking, it might be very, very difficult to push through a ‘no
haircut’ idea, given the IMF’s target.”